Category: IPOs

If you’ve subscribed to the Lotte Chemical Titan IPO as a retail investor, I would say congratulation as all your subscription had been approved due to under-subscription. In most cases, under-subscription equals death by humiliation but this time around it’s all forgiven.

Jokes aside, 11 July 2017 on opening we should see the prevailing price for LCTITAN and anything below RM 6.50 is institution’s loss. We see a few probably scenarios on 1st day of listing.

Below RM 6.50

Obviously this meant that you should start preparing your form and send it out right away to avoid probably delays. The risk falls upon you if you would like to wait and hope that prices would rebound higher and you could make a profit.

Remember that once you’ve sent out the request form, you have to abide with this rule

“l/We confirm that l/we own such Relevant Shares as at the Record Date and l/we will continue to own such Relevant Shares until the day such Relevant Shares are transferred to the Company’s CDS account (pursuant to paragraph 3 below).”

Make sure you have shares in your account equivalent to what you’ve subscribed to. No partial share amounts, just remember that.

Above RM 6.50

Congrats, I need not elaborate on this. But you might want to factor in transaction cost if price is merely a cent higher at RM6.51.

Stupendous amount of buyer at RM 6.50

We advise investors to do a cost analysis on their holdings. If you hold a small number of shares and your transaction cost isn’t huge. We recommend that you sell it to remove the risk of letters going missing and delayed cash return having to wait till Aug 2017. If you’re granted 100,000 shares, I guess it’s better to courier the document via PosLaju or any reputable couriers.

Meanwhile, don’t be scared if you’re successful in getting this under subscribed stock. Relax and have a good weekend, check your holdings if it’s correct in the morning of 11th July 2017.

Growth – 6

We rate growth at 6 due to its operations in Indonesia that would likely see major gains due to the increase in demand for olefins. From the IPO prospectus, it is expected that Indonesia would see double digit CAGR for all major olefins.

Nevertheless, Malaysian operations should remain normal but with the unknown exception of the effects from a full scale RAPID Pengerang Project.

Industry – 5

We could just rate industry a mere average since prices of feed had declined with crude but the industry still do not see a huge gain in terms of profit. A simpler way to understand is that olefins are not specifically ‘branded’ which makes it a commodity in the end rather than a good.

Financials – 8

Top notch financials with little to no debt and currently increasing in margin versus the other major names in this field.

Moat – 4

As stated in industry, the products offering do not have a specific brand to it. The company’s business does not differ from any of its competitors in the region.

Proceeds – 10

We rated a perfect 10 for proceeds as you can see that the funds raised would be fully utilize in business expansion which in the end turns into a new stream of revenue from the Indonesian side and de-bottle necking plans in place to increase the efficiency of the plants in Malaysia. One of the best IPO proceeds we are rated which reflects what raising funds should mean rather than settling debt obligation.

Valuation – 7

We rate valuations slightly better than average since at RM8.00 per share it should trade cheaper than its listed peers like Petronas Chemicals and PT Chanda Asri. At the moment Petronas Chemicals trades at 16.02 and PT Chanda Asri at 16.59 versus the expected PE of Lotte Chemical Titan at 15.

Conclusion

We recommend you to subscribe to this IPO due to good business structure, plan and good utilization of IPO proceeds. Growth should likely be healthy for Indonesia and the big chunk of money (around RM4 billion) would be utilized in the development of petrochemical plants over there.

Furthermore, we do not see any downside in first day of trade due to high institution allocation. Over 92% of the allocated shares are meant for institution which we would likely see a lock in period of 1 year.

Overall, we are satisfied with this company and the only thing worrying is the industry which is retreading of tyres. Obviously retreading is something that isn’t preferred by user but are still widely practiced especially on heavy duty tyres.

We feel that financials, moat and valuations would get an above average rating of 6 which is isn’t quite bad in our books. Being niche as it is, it does pay in one’s investment. The proceeds from IPO would be fully utilized for the business itself and that is why we rated it a solid 10.

As good as it gets, we have decided to recommend this IPO for subscription and highly recommending investors to buy if there’s any pull back in the price. We doubt that price on the first day of trading would spike but nevertheless it shouldn’t weaken by too much.

Over RM12.96 billion worth of Gross Development Value and a huge support from institutionals side with Guocoland securing 27% stake in this IPO. These heading creates a massive WOW! among crowds and truly marketing itself with all the hyped up headlines brewing interest and maintaining it as this is one of Malaysia’s biggest and most anticipated IPO.

Eco World International (EWI) would become a proxy for Malaysian investors to gain exposure in overseas housing markets. The RM12.9 billion worth of GDV accounts for 3 projects in the United Kingdom and one in Australia.

We are not interested in the project location as we believe that it likely to be out of investor’s control even if they plan to sell it off half way through. But we took a glimpse on the locations involved and rated average for it the reason being nothing much can go wrong with it. You can save your time to look up those locations unless you are buying a property there.

Let’s analyze the ratings given:

Growth (7) – We think that growth potential is huge with project value as high as RM12.9 billion. I guess that’s a very big order book or 5 times the expected market cap of RM2.58 billion post listing that would be raked in by this IPO at RM1.20 per share. The average Malaysian property developers has a GDV to market cap sits around 2.5 to 3.5 times.

Valuations (6) – We couldn’t derive the PE that we are expecting but a rough estimation from GDV of RM12 billion can be spread out in the next 5 years adding in a margin of 11% (referring to local minus 5% since EWI would likely have problems on foreign land). We come up with our projection with the PE of 9.23 at the listing price of RM1.20. But according to the timeline of the project development, we could only see these numbers later in FY2018.

Note that we haven’t include dilution from warrants that would be given out after a bonus issue. The valuations would definitely be more expensive with the exercising of warrants in the future.

Proceeds (3) – This is the part that’s bothering us every single time an IPO goes on air. We really dislike to invest in something that uses our money to pay debt. 52.9% of the IPO proceeds would be used to pay debt which makes it felt as if we are being used as bailout plan when a company gets loaded with a little too much debt. Obviously you can take a contradictory view where investors who want a piece of their landbank overseas would have to literally ‘share the cost’ of the landbank acquired earlier through debt.

Moat (5) – Neutral on EWI’s moat since everything looks average in our books. The moat isn’t that deep since it’s a developer but already owning the land for development in those location makes it look better on paper.

Financials (2) – Still a loss making company with accumulated losses of RM200 million in the balance sheet. Around RM900 million worth of borrowings are classified under current liabilities which meant that these liabilities need to be settled within a year or to refinance those borrowings with a longer tenure. This pretty much explains why so much of its IPO proceeds goes into debt repayment.

Industry (3) – Properties around the world might see slower than expected growth rates when increasing interest rates begin to loom. Perhaps the United Kingdom properties might fare better with historical low British Pounds that would likely attract foreign buyers into that market. Nevertheless, we still rate the industry a low 3 seeing that there’s a limited room to grow coupling with intense competition moving forward.

Conclusion

We recommend you to subscribe only to flip it over on the first day of trading expecting to register a huge gain in price with all the hype created. If you plan to hold the stock long term, I guess it would be more suitable to enter when the market is expecting good earnings for quarters ahead. That’s likely FY2018 or so since much of the completion comes in after 2019!

We felt that with an issue price of RM1.20 per share, we might see a 10-15% gain on the first day of trading which is a great opportunity for you to unload. The fact that this counter seems to be treated like a ‘superstar’ IPO and the high percentage of institution and director holdings lowers the downside risk on first day trading for this stock.

Well as we all know, the oil and gas sector in Malaysia as well as overseas such a Middle East has already matured with huge players having a commanding position in every way possible from services to equipment provision. We rated moat a low 3 since the moat factor isn’t quite wide for this company at the moment.

With oil coming back up, it is possible that it would gain momentum but we felt that the momentum of increase in oil price has to be huge than what it is now for them to feel the spillover effect. That explain why we rated an average 5 in terms of growth and slightly below average for the whole oil and gas equipment industry.

Financials and valuations remained the solid point where valuations are quite low and the company is growing year on year with its revenue. But is this a case of a revenue growth ending? We suggest that since CAPEX in most oil and gas companies were slashed, it might be that their revenue growth had peaked in 2015. We remain cautious for future outlook of this company since it is still early in the oil price rebound.

Proceeds from IPO were rated an average as well with a health mix of expansion and closing up some debt holes. The debt to equity of 80% is a little too high and it is good to restructure debt since a good restructuring could improve the ability to handle higher debt exposure

We do not think that this stock is could rally non stop together with current energy prices since it doesn’t have a direct impact from oil price volatility. We expect the stock to trade higher than the offer price for its valuation and momentum coming in from a rebounding energy market. The stock pricing would likely remain stable for the whole lock in period since high percentages of institutionals are holding it.

The best part is the proceeds for its IPO this round. It will fully fund the newly acquired properties and that is why we rated it an 8.

Growth and valuation sits high in our ratings as well since a REIT focuses on rental yield and it should have a steady growth in time. The current offer price of RM1.00 derives that the REIT is valued a the cheaper end against its competitors.

Financials are rated average but the REIT could still load itself with high levels of debt since its debt to equity levels are currently at 17%. Most REITs can leverage up to 100% of equity if the yield is good for a newly acquired property. Of course it may be hard to match a high yielding property with a cheaper borrowing.

Moat and industry rated lowest since being in retail REIT, the stickiness of its tenants would highly depend on the health of the economy and spending power. Moreover, KIP retail outlets are not what we consider ‘IGB REIT like’ properties and the appeal of its properties might degrade faster compared to others.

REIT itself might be facing a hard time when interest rates begin to rise again. With Fed rising rates, we fear that Bank Negara might follow to maintain the ringgit strength.

Basically, there’s zero to no moat for KIP REIT since its just like another other retail REIT.

We still recommend you to subscribe as we felt that this counter would have a good debut on its first trading day due to its prospects.

First off, we look at this company like any other plantation company in Malaysia and it scores a solid 7 on financials with margins that are on par within the league of plantation companies in Malaysia.

Next, a solid 6 for industry since most of the company’s assets are matured and ready to produce fruit. In fact, the Fresh Fruit Bunch (FFB) production might be at the peak this very moment which is intriguing for investors who love to see profit in the next couple of years.

Average rating on growth since it doesn’t differentiates itself from any other plantation company which also explains our rating of 3 only moat. Its only moat consist of the direct buyer of FFB Lenga which is close to the company’s estate.

You might wonder why we have a higher than average rating on the IPO proceeds. Since replanting exercise only takes up 1.5% of the IPO proceeds, does this mean that we will not see much growth ahead? Not quite…

But first we go to the largest portion (70%) which is to finance general working capital. The definition for working capital the company’s net current assets. A company might be paying off their current liabilities with IPO money which is really a crime since IPO proceeds should be used to grow and not to cover up debt holes.

But for Matang Berhad, the current liabilities sit at less than RM 1 million which meant that there aren’t that many debt holes to fill with the IPO proceeds. This meant that the IPO proceeds will likely go to current assets which includes cash for investment purpose or even buying more agriculture produce from other parties just to keep their main buyer stocked up.

Overall we value this IPO an above average rating but remember this is likely going to be a dividend yielder in the future than a highly active growth company.

As you can see most of the rating comes in at an average of 5 with financials being the lowest rated at only 3.

Being rated a 3 for financials doesn’t mean that the company is going bankrupt but we dislike what we see in the financial statements. Declining margins are a major concern for this company where cost of goods begin to rise over the years leading to 2016. We sense an adjustment in variable cost that buff up net profit pre-IPO where it leads to a valuation on price to earnings multiple of only 3.2.

It might seem cheap that you are paying just a 3.2 times earning premium for this stock but we fear that the degrading in net profit might catch up very soon. Although the proceeds from IPO being rated highest at 8, much of the proceeds into capital expenditure and R&D wouldn’t show up in the next 4 quarters or so. Look for signs of recovery in the future when the CAPEX starts to pay off.

The glove industry had turned stagnant with growth over these years and a heavy reliance towards the industry might not be the best path for HLT Global.

Overall, we would not subscribe for this IPO but from the looks of it, the stock might spike on the first day of listing due to how cheap its being traded versus its current financial position.

We think that the offering this round is above average and offered at a cheaper side of things with PE ratio estimated to be at 4.33 FY 2016. Although it is common that profit numbers are adjusted in preparation to beautify IPO image, giving it a 20% discount would still see around RM 13 million worth of profit that’s the reason for a 6.5 rating on Financials.

We rate growth, industry and moat a near average rating since the industry itself its filled with competitors and somewhat known as a matured industry. Growth was rated a little higher since the it operates in an ideal location which is Penang, the Silicon Valley of Malaysia.

We like how the company uses utilize their proceeds where a huge sum of it would go into expansionary plans by the company. From sales offices overseas to addition of new properties for production expansion, all these are key growth and this is what an initial public offering should look like seeking cash for growth rather than getting public money to help with debt payment.

We recommend you to subscribe for this offering as we believe that there’s value in this company and at the same time the valuations are selling this stock cheap.

Industry & Business

BCM Alliance deals with hospitals supplying medical devices which is a good industry to be in at the current moment. But the problem with supplying to hospitals usually meant that margins are squeezed badly being the middle man.

In the case for BCM, indeed margins are squeezed to near single digits and continuously getting threats from competitors which can offer cheaper alternatives or bigger discounts to hospitals. If products are basic generic medical equipment which in this case, ‘yes’; there are even more competitors out there supplying the same equipment but different brands. This explains the 2.5 rating on the ‘Moat’ that we are giving since the only moat is the brand name that it carries.

Listings

Not sure if many of you have gone through the details of the IPO but only 30% of the company would be offered to public in this IPO. The structure looks like this post IPO. (extracted from the prospectus)

In fact with the 30% (84.25 million shares) going to public, directors could take up 9 million which represents 3.2% and cornerstone investors would take up 18.95% of the company while the public is left with only 22 million shares or 7.83%

We expect limited liquidity available during the lock in period and if company performs badly inside the lock in period, it is likely that the stock price would tumble as soon as cornerstone investors get to sell their holdings.

Utilisation of Proceeds

The utilisation of proceeds isn’t that convincing either with 15.6% (that’s a huge sum) devoted to listing expenses compared to only 16.2% used for setting up 11 self-service launderette. Much of the other funds raised are used to stock up the company’s inventory. This is the reason why rate the proceeds at 2 which is the lowest rating among others.

Financials

As said earlier the margins are squeezed badly. One thing to be relaxed about is having a healthy debt level where post IPO debt/equity level are estimated to be at 23.49% Overall, we rate financials a 5.8 which meant that it is having satisfactory financial position.

Conclusion

We do not recommend this IPO much of it due to its listing structure and poor utilisation of proceeds.